Paytm, Zomato, BigBasket, others could run into India’s great FDI wall

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India’s top startup unicorns — including Paytm, Zomato, BigBasket and Dream11— that count Chinese investors among their largest backers are likely to face delays in raising capital after the government said all foreign direct investments from the world’s second-largest economy would be subject to its approval first.

A slew of growth and early-stage companies, too, which were in talks with Chinese investors for new investment rounds, will likely face difficulties, while follow-on rounds from existing backers may become increasingly complex to execute, according to investors, lawyers and startup founders.

“Companies like mine, where they (Chinese investors) already hold a 33% strategic position, are in a tough spot. No one will touch us in this environment,” the founder of a unicorn, requesting anonymity. The latest missive could potentially put future funding rounds on hold or at least take longer to execute, he added.

Chinese investors — both strategic and financial — have pumped in $3.9 billion in 2019, up from $2 billion in 2018. In the process, they have emerged as the biggest backers of the country’s fast-growing digital economy, supplanting the United States.

China’s internet giant Alibaba Group and its affiliate Ant Financial, Tencent Holdings and Fosun RZ Capital have poured in several hundred million dollars into a large number of Indian startups, including unicorns such as Paytm, Zomato, Delhivery, BigBasket, PolicyBazaar, Udaan, Oyo Hotels & Homes, Ola and Dream11.

For now, the startup ecosystem is waiting for detailed notifications under the Foreign Exchange Management Act (FEMA) and from the Reserve Bank of India, expected in the next two weeks.

“It will spook Chinese investors, even those that are looking to invest in sectors that come under the automatic route, such as e-commerce, fintech, digital services and logistics, which aren’t perceived as sensitive sectors,” Atul Pandey, partner at leading law firm Khaitan & Co said.

According to Pandey, a Chinese investor participating in an upcoming funding round in its existing portfolio companies will also need to get necessary approvals from the government before continuing to chip in money.

Investors and startup founders sharply criticised the government’s move. “We’re a capital-deficient country. There isn’t enough domestic capital to sustain economic growth. Yet we continue scoring own goals like retrospective taxation, transfer pricing, super-rich surcharge and now FDI approval. We’re not hurting the investors, we’re hurting our economy,” Ritesh Banglani, partner at Stellaris Venture Partners, wrote on microblogging platform Twitter.

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